In Ryan LLC v. Federal Trade Commission, the U.S. District Court for the Northern District of Texas on Aug. 20, 2024, set aside the Federal Trade Commission's (FTC) Non-Compete Rule, as promulgated in 16 C.F.R. § 910.1-6 (Rule). The court held the FTC exceeded its authority and that the Rule was arbitrary and capricious. The Rule, which purported to prohibit nearly all employee non-compete agreements on the basis that such agreements are "unfair methods of competition," was set to take effect on Sept. 4, 2024. The court's holding is not limited to the plaintiffs in the case and, instead, sets aside the Rule, blocking the enforcement of the Rule, nationwide, for all employers.

Background

The FTC issued the Rule on April 23, 2024, by a 3-2 vote along politically partisan lines. The Rule sought to prohibit employee non-compete agreements, with limited exceptions for 1) existing non-competes entered into by senior executives and 2) non-competes entered into as part of a bona fide sale of a business.

Hours after the FTC issued the Rule, Ryan, a Texas tax services firm, filed a lawsuit against the FTC in the Northern District of Texas challenging the Rule. The U.S. Chamber of Commerce and other industry groups later joined the lawsuit as plaintiff-intervenors in support of Ryan's challenge to the Rule. The plaintiffs argued the FTC violated the federal Administrative Procedure Act (APA) because the FTC exceeded its statutory authority and the FTC's actions were arbitrary and capricious.

On July 3, 2024, the Texas federal court issued a preliminary injunction prohibiting the FTC from enforcing the Rule against the plaintiffs. (For further background on the Rule and the court's preliminary injunction, see Holland & Knight's previous alerts, "New FTC Rule Ban Non-Compete Agreements in All Employment Contracts," April 23, 2024, "FTC Bans Non-Competes: Takeaways and Action Items for Healthcare Provider CEOs and Investors," April 26, 2024, and "District Court Issues Injunction Prohibiting Enforcement of FTC Non-Compete Ban," July 5, 2024.) Following the July 3 ruling, the parties moved for summary judgment.

The Decision in Ryan

On Aug. 20, 2024, Judge Ada Brown granted the plaintiffs summary judgment and set aside the Rule. The court concluded that "the FTC lacks statutory authority to promulgate the Rule, and … the Rule is arbitrary and capricious" and a violation of the APA. The court further held that "the FTC's promulgation of the Rule was an unlawful agency action." Accordingly, the FTC is now blocked from enforcing the Rule.

The Ryan Court's Analysis

The court first analyzed the text, structure and history of the FTC and determined that the FTC lacks the authority to create substantive rules regarding unfair methods of competition. The court concluded that "Section 6(g) of the Act does not expressly grant the [FTC] authority to promulgate substantive rules regarding unfair methods of competition."

The court also held that the Rule is arbitrary and capricious, applying the standards set forth by the APA. Under the APA's standard, an agency rule is arbitrary and capricious if:

The agency relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.

(Internal citation omitted.)

Applying the APA's standard, the court determined the Rule was arbitrary and capricious because "it is unreasonably overbroad without a reasonable explanation." The court concluded that the Rule "imposes a one-size-fits-all approach with no end date, which fails to establish a rational connection between the facts found and the choice made." (Internal quotations omitted.) The court explained the FTC's "lack of evidence as to why they chose to impose such a sweeping prohibition – that prohibits entering or enforcing virtually all non-competes – instead of targeting specific, harmful non-competes, renders the Rule arbitrary and capricious."

The court further determined "the Rule is based on inconsistent and flawed empirical evidence, fails to consider the positive benefits of non-compete agreement, and disregards the substantial body of evidence supporting these agreements." Additionally, the court found that the FTC's failure to consider exceptions or possible alternative to issuing the Rule did not adequately justify the Rule. Pursuant to the APA, the court concluded that the proper remedy was that the court "must hold unlawful and set aside the FTC's Rule."

Conclusion

The court's holding on Ryan blocks the FTC's enforcement of the Rule on a nationwide basis. The FTC may appeal the court's decision to the U.S. Court of Appeals for the Fifth Circuit and could also seek a stay of the Ryan court's decision and order, pending the outcome of an appeal. Litigation also continues in federal courts in Florida and Pennsylvania. Though the decision in Ryan is not the final word in the litigation challenging the Rule, employers are now relieved from the obligation to comply with the Rule by the initial effective date of Sept. 4, 2024. Employers nationwide should continue to monitor the course of the various cases challenging the Rule.